The term franchise tax refers to a tax paid by certain enterprises that want to do business in some states. In some quarters, franchise tax can also be referred to as a privilege tax, it gives the business the right to be chartered and/or to operate within that state.
Please note that a franchise tax is not based on income, it is rather based on the net worth of or capital held by the entity. The franchise tax effectively charges corporations for the privilege of doing business in the state.
In the United States, businesses that are required to register with the state are also required to pay a franchise tax. Businesses owned and operated by one person, or sole proprietors, aren’t subject to franchise tax in some states where they aren’t required to register the business.
States with higher corporate income taxes usually have low or no franchise taxes and vice versa. It is important to note that not all states have franchise tax in the United States. Only some states have businesses pay some sort of a franchise tax.
These taxes can be charged in addition to the other states’ taxes. As of 2019, the states with a type of franchise tax were: Alabama, Arkansas, California, Delaware, Georgia, Illinois, Louisiana, Mississippi, New York, North Carolina, Oklahoma, Tennessee, and Texas. Washington D.C. also has a franchise tax. Here are some of the states that have franchise tax in the United States.
States in the USA That Have Franchise Tax
1. California
Every corporation that is incorporated, registered, or doing business in California must pay the $800 minimum franchise tax.
California law generally imposes a minimum franchise tax of $800 on every corporation incorporated, qualified to transact business, or doing business in California. A corporation that incorporates or qualifies to do business in California is exempt from paying the minimum franchise tax in its first taxable year.
Please note that the California Franchise Tax Board imposes a penalty if you do not pay the total amount due shown on your tax return by the original due date. The penalty is 5 percent of the unpaid tax (underpayment), plus 0.5 percent of the unpaid tax for each month or part of a month it remains unpaid (monthly).
2. Florida
The Florida Corporate Income Tax or franchise rate used to be 5.5%. But recently, the tax rate was reduced from 5.5% to 4.458% for taxable years beginning on or after January 1, 2019, but before January 1, 2022. Further reduction in the tax rate is possible for taxable years beginning on or after January 1, 2020, and January 1, 2021.
3. New Jersey
In New Jersey, franchise taxes are generally either a flat fee or an amount based on a business’s net worth. New Jersey taxes corporate income through its corporation business tax (CBT), but the state does not have any franchise or privilege tax generally applicable to businesses.
4. Georgia
Georgia imposes a net worth tax (like a franchise tax) in addition to the corporate income tax. The net worth tax is based on a corporation’s issued capital stock, paid-in surplus, and earned surplus employed within Georgia. (b) Tax rates.
5. New Mexico
The franchise tax is a flat yearly fee of $50 that is required to be paid by every corporation in New Mexico, including S-corporations. Please note that in New Mexico, both the franchise tax and corporate income tax must be paid by the 15th day of the fourth month following the company’s tax year
6. Louisiana
Under Act 12, all entities that have elected corporate federal income tax treatment must also pay Louisiana franchise tax. Two exceptions exist for LLCs that have opted for pass-through taxation under Subchapter S (S corporations) Entities purchased by an S corporation in 2012 or 2013.
7. Mississippi
Mississippi collects franchise tax, but it is important to note that Mississippi’s franchise tax applies to most corporations doing business in the State. The rate is $2.50 per $1,000 of the value of the capital used, invested, or employed in the State.
8. Illinois
Each domestic and foreign Illinois Corporation is required to pay franchise tax at the time of filing its first report of issued shares (articles of Incorporation or application for authority) for the privilege of exercising its franchises in the State of Illinois.
Please note that for eCommerce businesses operating out of Illinois, the franchise tax obligations for your business will depend on the form of your business – is it an LLC, partnership, or corporation? franchise or net worth tax and does not include registration fees or other regulatory payments that may be due by your business.
9. Massachusetts
Yes, Massachusetts also collects franchise tax, and the Massachusetts Corporation Excise Tax, which is the general tax on corporations, consists of a net income and a franchise tax component.
10. Indiana
In Indiana, franchise taxes are generally either a flat fee or an amount based on a business’s net worth. Indiana is like most states in that it has a corporate income tax, but unlike many states, in that, it does not have any franchise or privilege tax generally applicable to businesses.
11. Kansas
Business entities that have $1 million of net worth or more in the state must pay to the Kansas Department of Revenue for the tax year 2010 a franchise tax of .03125 percent of the total net worth.
12. Nebraska
In Nebraska, franchise taxes are generally either a flat fee or an amount based on a business’s net worth. Nebraska has both a corporate income tax and a franchise tax known as the corporation occupation tax.
13. New York
New York is not one of the states where franchise tax is collected, but it requires S corporations to pay the corporation franchise tax.
14. North Carolina
North Carolina has franchise tax and the franchise tax rate is $1.50 per $1,000.00 of the corporation’s net worth or other alternative tax schedules. The minimum franchise tax is $200.00 with no maximum except for a qualified holding company. The corporate income tax rate is 2.5% of net income attributed to North Carolina.
15. Delaware
The state of Delaware has a significant franchise tax whereas other states have either nominal taxes or none at all.
16. Texas
In Texas, businesses with $1.18 million to $10 million in annual receipts pay a franchise tax of 0.375%. Businesses with receipts less than $1.18 million pay no franchise tax. The maximum franchise tax in Texas is 0.75%. Please note that in Texas, each taxable entity must file a Franchise Tax Report (No Tax Due, EZ Computation, or Long Form) and an Information Report (Public Information Report or Ownership Information Report).